King Dollar Looming Curse for CFOs

By Currencies

The phrase ‘king dollar’ is back in vogue. In the days following the British vote to part ways with the European Union, the dollar/euro extended gains on Monday after seeing the biggest one-day jump since August of 2010 following the Brexit referendum.

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For chief financial officers who manage the balance sheet of multi-national companies, a surging dollar can be a curse cutting into profits and sales. Even before Brexit these CFOs were monitoring the backlash of a strengthening greenback, according to Deliotte’s latest ‘CFO Signals’, a quarterly survey of 140 CFOs from North America’s largest corporations who oversee $1 billion in revenues.

Those concerns “extend not just to currencies but oil and commodities are top concerns as well,” said Sandy Cockrell, Global Leader, CFO Program, Deloitte during an interview with FOXBusiness.com.

In fact, worries over higher commodity prices increased in the second quarter as oil topped the $50 per-barrel level.

However, Deliotte’s CFO base is not the only group sounding the warning bell on the U.S. dollar which, until late last week, was seeing a dial back against the yen and euro as those central banks pump ongoing stimulus into their economies.  For the year, the yen remains 15% higher vs. the dollar and the euro 2%.

Although Deloitte’s survey was taken before the U.K’s Brexit decision Cockrell points out CFOs were well aware of the weakening economy across the pond before the actual vote.

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“The European economy, the U.K. is in turmoil. We’ve seen that quarter-over-quarter in our surveys,” he said. 

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To that point the firm notes 40% of the CFOs polled remain optimistic about the state of the North American economy, enough so that they plan to boost revenue initiatives over cost cutting and are slightly more optimistic about hiring. 

However a weaker-than-expected 2Q earnings season could alter that view.  

Coming into the start of the [2Q] earnings season, there are concerns in the market about the impact of the stronger U.S. dollar (relative to last year),” wrote FactSet’s John Butters who oversees the company’s earnings research. He estimates that companies which generate less than 50% of sales inside the U.S. could see earnings and sales decline 9% or more.

Compare that to companies that do the bulk of business inside the U.S., sales may increase 2.5%, while earnings may still drop 2.8%.

Investors are likely to get their first inkling of how the Brexit-induced currency craze is viewed by multi-nationals when apparel giant Nike (NKE) reports earnings on Tuesday. While the shoemaker boasts superstar baller and NBA Champ MVP LeBron James, it gets over 50% of its sales from overseas markets dominated by Europe. A tall feat for even LeBron to offset. 

Nike shares have lost 15% this year with the bulk of drop taking place during the 2Q.

Suzanne O’Halloran is Managing Editor of FOXBusiness.com and a graduate of Boston College. Follow her on @suzohalloran.

 

 

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